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Capital Controls, Macroprudential Regulation,and the Bank Balance Sheet Channel

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  • Shigeto Kitano

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

  • Kenya Takaku

    (Faculty of International Studies, Hiroshima City University, Japan)

Abstract

We incorporate a banking sector with balance sheet frictions into a model of a small open economy and compare the effectiveness of capital controls and macroprudential regulation. We show that the welfare-improving effect of capital controls is larger than that of macroprudential regulation if the degree of financial friction between domestic banks and foreign investors is high, while the welfare-improving effect of macroprudential regulation is larger than that of capital controls if the degree of financial friction is low. We also show that the welfare ranking of the two policies depends on whether an economy suffers from liability dollarization.

Suggested Citation

  • Shigeto Kitano & Kenya Takaku, 2017. "Capital Controls, Macroprudential Regulation,and the Bank Balance Sheet Channel," Discussion Paper Series DP2017-18, Research Institute for Economics & Business Administration, Kobe University, revised Jan 2019.
    • Handle: RePEc:kob:dpaper:dp2017-18
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    Cited by:

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    2. Kitano, Shigeto & Zhou, Yang, 2022. "Effects of China’s capital controls on individual asset categories," Finance Research Letters, Elsevier, vol. 49(C).
    3. Villca, Alfredo, 2022. "Commodity prices, bank balance sheets and macroprudential policies in small open economies," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 3(1).
    4. Benbouzid, Nadia & Kumar, Abhishek & Mallick, Sushanta K. & Sousa, Ricardo M. & Stojanovic, Aleksandar, 2022. "Bank credit risk and macro-prudential policies: Role of counter-cyclical capital buffer," Journal of Financial Stability, Elsevier, vol. 63(C).
    5. Shigeto Kitano & Kenya Takaku, 2022. "Financial market incompleteness and international cooperation on capital controls," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 624-642, December.
    6. Ali, Mirzaei & Iness, Aguir, 2020. "Capital inflows and bank stability around the financial crisis: The mitigating role of macro-prudential policies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 69(C).

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    More about this item

    Keywords

    Capital control; Macroprudential regulation; Financial frictions; Financial intermediaries; Balance sheets; Small open economy; Liability dollarization; DSGE; Welfare;
    All these keywords.

    JEL classification:

    • E69 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Other
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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